3 Urban Legends of Bitcoin Debunked

When I started my first company in the cloud computing space in 2011, much of it was similar to what I see in cryptocurrency today. It’s a seemingly complicated subject that has terms and acronyms that the average person can’t wrap his or her head around, which leads to confusion and misrepresentation. As a result, manipulation and deception thrive on both ends of the spectrum, creating both fear and admiration for this enigmatic topic; at the end of the day, misinformation wins.

Attempt to explain cloud computing or blockchain, and many will realize it’s about as complicated as explaining how the processors in their iPhone generate the display on the screen - but therein lies the trick to understanding. With the iPhone, you don’t need to learn the intricacies of semiconductors, ALUs, or binary representations of strings to understand that it provides you value (if you’re actually curious, this explainer video is a good place to start, and then read But How Do It Know). You know that you can take or make calls, send or receive photos, and connect to the Internet to use social media, among other things.

The inside of iPhones - most of the space is used to just hold battery power!

The same is said about anything, from aspirin to sleep to Bitcoin; in fact, scientists can’t fully explain why we sleep. But that doesn’t stop you from trying to get eight hours, right? The value you receive from services, objects, or even your own body, can be understood and utilized without needing to fully understanding the underlying mechanisms that enable it. Don’t get me wrong — I’m not saying that you shouldn’t take the plunge and educate yourself on the technical intricacies if you want to — blockchain is a great technology that solves problems that decentralized systems have faced in the past such as trustless consensus.

At the end of the day, though, the value that Bitcoin brings to the table is its potential to replace the current digital currency system with a more efficient and democratized methodology built for a global economy. Yes, replacing. Digital currency already exists.

90% of existing money is only digital - i.e., a digital currency. Only $6 trillion, or approximately 10%, of the world’s current money supply is in the form of cash (Sapiens, 2011). So believe it or not, you’re already using digital currency when you swipe your credit or debit card. Bitcoin has the potential to replace the underlying engine that powers the same transactions you make today by being more efficient and entirely trusted - ironically, by being trustless. A mom-and-pop coffee shop wouldn’t have to pay VISA $0.25 for a $10 transaction. Wire transfers in and out of the country could happen in minutes to hours, rather than days. Creating new accounts can happen in seconds with privacy, rather than days filling out paperwork and waiting for approval.

With all of this value at hand, though, misinformation continues to permeate conversations about cryptocurrency. Most of these conversations are regurgitation of rumors and claims fortified by incomplete understanding. Three common arguments against Bitcoin I witness are:

Bitcoin is used for illegal activities,

Bitcoin is not backed by anything, and

Bitcoin is unregulated.

First and foremost, let me say this: all three are true. But there is a deeper examination to be had for each to better understand exactly what impact it has on Bitcoin, or what impact Bitcoin has on it.

1. Bitcoin Is Used in Illegal Activities

One of the primary arguments is that Bitcoin is used for illegal activities. There has been many studies done on this behalf, and one of the most recently published research papers is Sex, Drugs, and Bitcoin: How Much Illegal Activity is Financed Through Cryptocurrency. In this paper (published in January 2018). researchers argue that “around $72 billion of illegal activity per year involves bitcoin, which is close to the scale of the US and European markets for illegal drugs.” Considering that the entire market cap of Bitcoin at the end of 2016 was only $14 billion, that speaks volumes (pun intended) to the amount of illegal activity conducted through the cryptocurrency.

There is no doubt that Bitcoin’s early use cases were for obfuscation purposes that suited the needs of the Internet black market. In 2013, the FBI seized the Silk Road (the largest known black market at the time), and as a result, also seized almost 150,000 Bitcoin.

“In recent years (since 2015), the proportion of bitcoin activity associated with illegal trade has declined… [due to] an increase in mainstream and speculative interest in bitcoin."

But there has come an inflection point in the adoption and use of Bitcoin; researchers in the paper point out that “in recent years (since 2015), the proportion of bitcoin activity associated with illegal trade has declined.” While one of the supposed reasons for this transformation argued by the research is “the emergence of alternative cryptocurrencies that are more opaque and better at concealing a user’s activity,” the other one is “an increase in mainstream and speculative interest in bitcoin.”

In other words, as more people are starting to get interested in Bitcoin, the amount of transactions used for illegal activities is declining — the new wave of Bitcoin enthusiasts are embracing the idea of using it for different purposes, whether it is to conduct legal transactions, hold for investments, or other uses.

“The very nature of cash, as opposed to bank deposits, is that it is pretty much untraceable. In practice, the currency in our wallets is only the tip of the monetary iceberg: the vast majority lies beneath the surface of the economy, stashed away in mattresses and warehouses, held overseas or circulating illegally on the black market.”

On the other hand, on March 24, 2015, economist Ed Conway published an editorial We Don’t Need Cash, Let’s Abolish It Outright. Don’t get confused — the argument for getting rid of cash is applicable only to cold, hard, physical cash. But only 10% of all money exists as cash today; the other 90% already exists as digital currency. In other words, out of the $60 trillion in global circulation, only about $6 trillion of it is in cash (Sapiens, 2011). So if everyone in the world decided to cash out immediately… Well, I recommend you grab some popcorn!

Over 50% of cash in most countries is used to hide transactions…

Anyway, much like Bitcoin, “ the very nature of cash… is that it is pretty much untraceable. In practice, the currency in our wallets is only the tip of the monetary iceberg: the vast majority lies beneath the surface of the economy, stashed away in mattresses and warehouses, held overseas or circulating illegally on the black market” (Conway, 2015).

In the Harvard-published paper entitled Costs and Benefits to Phasing Out Paper Currency, Economist Kenneth Rogoff points out that over 50% of cash in most countries “is used precisely to hide transactions.” The anonymity of paper money, a property inherent in Standard Monetary Theory (Kiyotaki and Wright 1989), is catalyzing the use of physical currency in illicit activities as well. In 2013, (Rogoff, 2014) nearly 78% of cash in circulation in the United States were $100 bills; only 4% of cash was $10 or below. When was the last time law-abiding citizens like you or me used a $100 bill in a transaction?

Although illegal Bitcoin transactions are diminishing with increased adoption and development in the cryptocurrency economy, it seems that cash transactions are becoming increasingly used for the same reasons. It’s become such an issue that “regulators are beginning to collect intelligence on whether households and banks are stockpiling cash, stacking it away on pallets in warehouses behind lock and key” (Conway, 2015).

While research suggests that almost 48% of Bitcoin transactions are used in facilitating illegal activity, the same can be said about cash, where economist Kenneth Rogoff points out that over 50% of cash in most countries is used to hide transactions. With the increased adoption of Bitcoin, the percentage of illegal transactions is falling due to newfound enthusiasm for its use in other activities such as investment; by contrast, cash is becoming more of an issue.

Of course, the amount of illegal transactions occurring through Bitcoin is alarming. The idea that the percentage is diminishing with increased adoption is a good sign. But the reality is that illegal activities and transactions will continue to be fueled regardless of Bitcoin’s existence. The culprit isn’t Bitcoin or cash alone, but both, because they are hard to trace.

Whether or not the privacy of such transactions benefit the economy is an argument of principle and will ultimately boil down to a decision of whether or not the anonymity should be preserved. With criminal use inversely correlated with the recent adoption of Bitcoin, and the emergence of alternative cryptocurrencies specializing in anonymity/privacy, Bitcoin is not required to be an anonymous currency. After all, the paper Sex, Drugs, and Bitcoin: How Much Illegal Activity is Financed Through Cryptocurrencypoints out that “the emergence of alternative cryptocurrencies that are more opaque and better at concealing a user’s activity” than Bitcoin is.

2. Bitcoin Is Not Backed By Anything

Another common critique of Bitcoin is that it isn’t backed by anything of value. But the current cash system isn’t back by anything, either. In the United States, President Roosevelt eliminated the Gold Standard (having the U.S. dollar backed by gold) in 1933. Even prior to 1933, the existence of the Gold Standard or any other standard for backing currency was little more than a psychological comfort; after all, gold has little practical value.

Do you love Gold because of its conductivity?

Sure, one can argue that gold is conductive and people could use it for circuit boards and stuff, but onecould also argue that paper is flammable and people could use it to heat places up, so therefore cash itself has value and has no need to be backed by gold. Face it, most people won’t mold gold into conductive material for circuit boards just as they won’t burn money to warm up a cold winter. The majority of gold’s value is in its supply and demand. By transitive property, the majority of the value in currencies that were pegged to gold was also in its supply and demand. Therefore, by eliminating the Gold Standard, the United States effectively eliminated the middle man in currency value — transforming it into a pure supply-and-demand game, where the United States can control the supply side.

Bitcoin is also a supply and demand game. Because it isn’t regulated by a single entity, though, there is no control on the supply side, unlike with government-backed currencies. Furthermore, the entire market cap and volume is a grain of sand compared to the beach that is existing currency supply — the current supply of Bitcoin equals to about $100 billion in value, while the total available money in the world (both digital and fiat) is around $60 trillion.

“The sum total of money in the world is about $60 trillion.”

-Sapiens by Yuval Harari

The small total valuation of Bitcoin, combined with the lack of centralized control on the supply side, are two contributing factors (of course, among a plethora of others) to its pricing volatility.

3. Bitcoin Lacks Regulation

Another argument against Bitcoin is that it is unregulated. Whether the lack thereof is an advantage or disadvantage is subjective and quite a matter of heated debate. Because the cryptocurrency world is nascent, though, it provides the world with an opportunity to apply only necessary regulations and policies, resulting in a much more streamlined system.

And it must be done carefully; regulation blankets policies over an entire population, which can leave many citizens victims of circumstance. On March 2018, Donald Trump enacted a trade tariff on China that severely increased the cost of imported steel and aluminum. In response, on April 2018, China enacted its own tariffs on the United States on imports of things like pork, fruit, and steel. Now, the world sits and watches as fears of a potential trade war are slowly inching towards reality. Many fear China’s potential tariffs on U.S. soybeans, which account for 1/3 of soybean sales in the United States.

Steel, pork, fruits and soybeans — so what? Who cares if the U.S. can’t sell soybeans to China anymore? Well, we, as humans, should care. Humanity isn’t a list of social security numbers lined up for their turns at daily eight-hour tasks. Individuals that farm the soybeans, pigs, and fruits, will be directly impacted as potential sales drop as a direct result of the tariffs— and the most impacted individuals are not privy to the decisions made by the figureheads of the nations. These are the same figureheads that currently regulate the existing money system.

Just because something is regulated or has rules doesn’t mean it’s good. It’s similar to receiving a new phone, only to find that it’s already full of bloatware — apps that you have no intentions of using but can’t delete. They only take up space, and at worst, slow your phone down.

With 90% of the world’s current money supply existing as digital currency, the world is slowly phasing out paper money. Bitcoin is a digital currency, and the major difference is that it uses a decentralized methodology that is fairer than the existing system because it does not depend on trust — just logic. Of course, more regulation is needed and will emerge as it becomes more widely adopted. With the right regulation in place, though, it can become a much more efficient and fair currency model than our existing systems.